Pros and Cons of Different Types of Mortgage

Previous lessons described different types of mortgage loans, each with its own set of advantages and disadvantages. This lesson summarizes the pros and cons.

How to Find the Best Mortgage: General Recommendations

The mortgage that is right for you will depend on your tolerance for risk, your personal financial situation, and economic conditions. Finding the right mortgage can be a challenge since you have many options. However, knowing the pros and cons of different types of mortgages will help narrow your search.

• Choose the mortgage with the lowest total cost during the time that you own your home. (You can see examples that illustrate how to find total mortgage cost in the total cost case study and in the choose between two mortgages case study.)
  
  
  • If you will only own the home for a few years, consider an adjustable-rate mortgage. They typically have lower initial rates.
    
    
  • If you will own the home for many years and interest rates are at historic highs, consider an adjustable-rate mortgage. It will have a lower starting rate than a fixed-rate mortgage; and the rate may decline over time, when you can refinance into a fixed-rate mortgage. (Note that the rate may not decline immediately. In fact, it may go up. Follow this recommendation only if you have the financial wherewithal to survive a rise in interest rate.)
    
    
  • If you will own the home for many years and interest rates are at historic lows, consider a fixed-rate mortgage. It will lock in the low rate over the life of your loan.
  
  
• Some mortgages (e.g., interest-only loans, graduated-payment loans) are attractive for their low monthly payments. Consider these options only if you expect to have a problem paying the monthly note. If you plan to live in the home for more than a few years, these loans may be poor choices. Here's why.
  
  
  • The interest-only loans do not build equity through amortization, and the graduated payment loans can result in negative amortization.
    
    
  • Compared to other types of loans, the total mortgage cost over the life of the loan tends to be higher.
  
  
• If you are risk-averse and it is unclear whether a fixed-rate or an adjustable-rate mortgage is better, you may be happier with the fixed-rate mortgage. For cautious borrowers, the fixed-rate loan offers the peace of mind that comes from knowing that your mortgage payment will not increase over the life of the loan.

Advantages and disadvantages of specific types of mortgages are summarized in the tables below.

Pros and Cons of Fixed-Rate Mortgages

This tutorial has described four different kinds of fixed-rate mortgages. Here are the advantages and disadvantages of each.

Pros and Cons of Adjustable-Rate Mortgages

This tutorial has described six different kinds of adjustable-rate mortgages. Advantages and disadvantages of each are summarized below.